Debt markets, not jobs no. will determine lift off

Today’s job number does not give the Fed a solid green light, despite Janet Yellen’s jawboning about raising rates.

That’s because I think the jobs number is less important than what the Fed sees happening in the high-yield (what use to be called the junk bond market) corporate bond market.

There is quite a dislocation in price caused by panic selling as default fears rise on this slightest move to tighten credit.

The problem for the Fed is not the 0.25% rise, it’s the amount of excess liquidity that must be sopped up in the reverse repo market to achieve the incremental rise. By some estimates that could be as high as $800B, which will only accelerate the downside on corporate bond pricing.

That’s causing the fear of contagion as margin and defaults cause selling in the larger corporate bond market dropping price and soaring yields for short and longer term borrowing.

So going forward stocks selling off on Fed tightening is a symptom of a larger dislocation in bonds, not a direct reaction to the ending of free money.

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